Real Estate

After all this, Where will DT Toronto Precon Condo Prices end up??

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  • May 11th, 2020 2:16 am
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After all this, Where will DT Toronto Precon Condo Prices end up??

No one knows what the new world of preconstruction condo prices will look like once society fully adjusts to a new normal but if you had a crystal ball, where do you think the downtown Toronto precontruction condo prices will end up in 2 years? 5 years?

My guess, builders will sit on projects that haven't launched and we'll see less project launches over next 2 years. Reduction in demand (due to various economic factors) will also cut into precon price per foot highs from Jan 2020. Precon prices of $1300/$1400 will take time (several years) for the new market to catch up to. I do not think we'll see new downtown precon projects listing for less then $1k per sqft. We will see some precon investors (who bought a few years ago) try to assign their units for under $1k per sqft (cash out and run)
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Lots of factors to consider, but pre con stopped making sense when resale cost the same per square foot yet you were still taking on all the construction risk (things have become much worse with pre con being more than resale - this makes zero sense regardless of what narrative starry eyed realtors are feeding you). With that in mind and based on history when it was lucrative to buy pre con because it was double digit discounted to existing resale if I was to speculate that is where we are going if the margins are there for the developer (something tells me margins won't be there, but renegotiating of construction contracts and land cost margins may magically fall in line over time).

Pre con at 0%-10% discount per square foot from comparable existing resale is what "feels" might be the direction we are heading in. Reason being is that pre con always "worked" as long as we had massive appreciation YoY into infinity (last 2 decades). Assuming prices stay flat or at worst decline the only directional factor that propped up pre con being gone then I think projects at discount to resale will make sense as the pricing metric. This statement carries variability because if resale condos go down so would appetite for pre con (this is why I am pegging a % to a moving target than trying to aim at $1,xxx/sq. ft.)

The big issue however is construction cost which has gone up dramatically over the past decade that I don't know what gives first between developer margin/construction/permitting/land cost. Those are your 4 major buckets, the reduction per unit has to come out of three (margin/construction/land cost).
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RichmondCA wrote: Lots of factors to consider, but pre con stopped making sense when resale cost the same per square foot yet you were still taking on all the construction risk (things have become much worse with pre con being more than resale - this makes zero sense regardless of what narrative starry eyed realtors are feeding you). With that in mind and based on history when it was lucrative to buy pre con because it was double digit discounted to existing resale if I was to speculate that is where we are going if the margins are there for the developer (something tells me margins won't be there, but renegotiating of construction contracts and land cost margins may magically fall in line over time).

Pre con at 0%-10% discount per square foot from comparable existing resale is what "feels" might be the direction we are heading in. Reason being is that pre con always "worked" as long as we had massive appreciation YoY into infinity (last 2 decades). Assuming prices stay flat or at worst decline the only directional factor that propped up pre con being gone then I think projects at discount to resale will make sense as the pricing metric. This statement carries variability because if resale condos go down so would appetite for pre con (this is why I am pegging a % to a moving target than trying to aim at $1,xxx/sq. ft.)

The big issue however is construction cost which has gone up dramatically over the past decade that I don't know what gives first between developer margin/construction/permitting/land cost. Those are your 4 major buckets, the reduction per unit has to come out of three (margin/construction/land cost).
Great point. I agree construction costs/dev fees/land have all gone up. The city will be reluctant to cut back on that revenue now more then ever. Will builders sit on land with the hopes of an improving economy should this drag on? Will they bite the bullet and cut into their margins? If 6 months from now there is a vaccine/antidote and everything fully opens up again and people are travelling/immigrating things could return closer to pre-pandemic levels. Lots of what if's...
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Builders simply will not build. They will wait it out.

Buyers will be able to bargain a bit.
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JayLove06 wrote: Builders simply will not build. They will wait it out.

Buyers will be able to bargain a bit.

Some will, many can't. A lot of these projects are backed by investor capital with different objectives. If there is long term uncertainty they may force a liquidation even at a loss to deploy that capital elsewhere. Which brings me to the point I made earlier, this may be one way that land cost may drop making cheaper condos viable. This is a very long drawn out process, but nonetheless it's on the mind of investors who are sitting with money tied up in cancelled/on hold pre con projects.
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RichmondCA wrote: Some will, many can't. A lot of these projects are backed by investor capital with different objectives. If there is long term uncertainty they may force a liquidation even at a loss to deploy that capital elsewhere. Which brings me to the point I made earlier, this may be one way that land cost may drop making cheaper condos viable. This is a very long drawn out process, but nonetheless it's on the mind of investors who are sitting with money tied up in cancelled/on hold pre con projects.
I disagree for the most part especially condos. Builders sit on land for years. If the numbers do not work, thry will not build. Why build if you will lose money? Thry will hold and wait. Thry may sell land thry already own. Not saying thry will completely stop building anything, but thry will not be as active. The numbers have to make sense. Now the ones that are already in progress well you will see cancellations, delays, and in some cases discounts on remaining stock. Likely just incentives. That’s just my take.

Also, unless all the costs drop by a large margin along with the government’s cut, I don’t see how the numbers work. Land downtown isn’t dropping much IMO. builders hold land for a long tome. 10 years from now values will be higher. I’d agree with you if we basically went into an economic tsunami and everything across the board dropped 50%, immigration banned, CERB on year 5 and we have 50% employment.....and we are waiting in line for food. Yea. I just don’t see that happening. I could be completely wrong though but a lot needs to happen.

Builders have their margins built in, government has their cut built in. I don’t see land selling 1/2 price downtown Toronto.
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Pre-con will likely not command the prices seen so far. I think a a second wave of job losses is gonna hit. A lot of companies have held off making cuts because of potential bad publicity in these times. Once things get back to normal, companies will cut citing reduced demand for their services/products.
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lpin14 wrote: Pre-con will likely not command the prices seen so far. I think a a second wave of job losses is gonna hit. A lot of companies have held off making cuts because of potential bad publicity in these times. Once things get back to normal, companies will cut citing reduced demand for their services/products.
What do you feel the new normal $/sq foot price range will be for Downtown condos once the cuts you envision start happening?
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JayLove06 wrote: I disagree for the most part especially condos. Builders sit on land for years. If the numbers do not work, thry will not build. Why build if you will lose money? Thry will hold and wait. Thry may sell land thry already own. Not saying thry will completely stop building anything, but thry will not be as active. The numbers have to make sense. Now the ones that are already in progress well you will see cancellations, delays, and in some cases discounts on remaining stock. Likely just incentives. That’s just my take.

Also, unless all the costs drop by a large margin along with the government’s cut, I don’t see how the numbers work. Land downtown isn’t dropping much IMO. builders hold land for a long tome. 10 years from now values will be higher. I’d agree with you if we basically went into an economic tsunami and everything across the board dropped 50%, immigration banned, CERB on year 5 and we have 50% employment.....and we are waiting in line for food. Yea. I just don’t see that happening. I could be completely wrong though but a lot needs to happen.

Builders have their margins built in, government has their cut built in. I don’t see land selling 1/2 price downtown Toronto.

My bad, I should've clarified.

You are correct some builders have inventory of buildable land that was bought years ago, I know a few personally that are developing land actively now that was purchased in the 70's. I don't have the data to support either case, but from my experience and the dealflow I've seen for most land being developed isn't legacy land (especially downtown) and has changed hands recently (last decade and a half). We've had a very active market for developer land in the core and it has traded at very hefty premiums. Again I can't say with certainty what the numbers are as I am limited to only what I've seen, but I am of the opinion that most projects out there are investor backed and is not cheap land that developers have been sitting on for ages (although I agree this exists I think it's the exception, not the norm).

I also have recency bias as I've seen deal flow of downtown lots being transacted which have been investor backed as the loan to value has been over the bank's risk appetite (over the last 3 years)

If someone can chime in with actual data it would be helpful.

Here is a small example of investors funding a development, these have been going on for a long time now...

https://wildlaw.ca/transactions/2020/pl ... -offering/
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builders will do one of three things it depends on where in the process they are:

plans only - sit on the project

pre-sales - sit on the project for a bit until they assess whether to move forward or cancel

construction phase - continue to build and hope to complete or bail at a loss to some other buyer or file for bankruptcy or throw in the towel and end up like that popular Bayview Ave, white elephant
Last edited by licenced on May 6th, 2020 8:22 pm, edited 1 time in total.
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FedExpress wrote: What do you feel the new normal $/sq foot price range will be for Downtown condos once the cuts you envision start happening?
$900-1000 psf for new projects.

I heard a couple of years ago that a couple of condo towers were going to get built in the Bayview Village parking lot area. Not sure if that was true or not, but if it was, I wonder what's going to happen now.
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Are investors who bought into projects like The Well or United getting worried? Too early to say perhaps...
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FedExpress wrote: Are investors who bought into projects like The Well or United getting worried? Too early to say perhaps...
Those projects are several years away from being completed. I don't think they're worried. People closing in the next 6 months to a year? Yea, probably worried. It's a shame that it came to this. I think many could have handled a normal downturn and dealt with the paint that those bring. But this is on a whole other level of craziness.
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Builders will just sit on the land. These people have long time-frames.

Do you know how long the builder was sitting on the site for Union Village in Markham? yeaaaaarrrrrrrrs.

Kylemore homes owns more land at Kennedy and Major Mack that is adjacent to the land owned by Minto/Metropia. They havn't developed the land either.

Builders just leave the site as a parking lot if they have to. Don't worry about these people. They will come out ahead and people will pay.
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FedExpress wrote: Are investors who bought into projects like The Well or United getting worried? Too early to say perhaps...
The well construction is well under way, and the pricing, looking back, was very attractive when you compare to what 55 mercer sold for.
I am not concerned for buyers of the well at all.
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lpin14 wrote: $900-1000 psf for new projects.

I heard a couple of years ago that a couple of condo towers were going to get built in the Bayview Village parking lot area. Not sure if that was true or not, but if it was, I wonder what's going to happen now.
Downtown core? zero chance under 1k sqft.
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oasis100 wrote: Builders will just sit on the land. These people have long time-frames.

Do you know how long the builder was sitting on the site for Union Village in Markham? yeaaaaarrrrrrrrs.

Kylemore homes owns more land at Kennedy and Major Mack that is adjacent to the land owned by Minto/Metropia. They havn't developed the land either.

Builders just leave the site as a parking lot if they have to. Don't worry about these people. They will come out ahead and people will pay.
Yea, builders sit on land for yearsss...do soil testing and a bunch of other things before even hitting sales. It takes a very long time to get a residential condo built from beginning to end.

People who get in trouble are those who buy houses because there is a very short building construction period from beginning to end. That's like 6-7 years of appreciation vs 1-2 years.
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oasis100 wrote: Builders will just sit on the land. These people have long time-frames.

Do you know how long the builder was sitting on the site for Union Village in Markham? yeaaaaarrrrrrrrs.

Kylemore homes owns more land at Kennedy and Major Mack that is adjacent to the land owned by Minto/Metropia. They havn't developed the land either.

Builders just leave the site as a parking lot if they have to. Don't worry about these people. They will come out ahead and people will pay.
This is all land on the outskirts, Remington Group, Kylemore, etc have been holding on this stuff for decades. Just like TriCap that's bought up a ton along the 404 and Buttonville.

Same with Kylemore's project along Langstaff between Yonge/Bayview.

Downtown core parcels are not in the same category as the above, there is a lot of private placement money propping up those developers and land in the core. I am not saying there is going to be a fire sale of sorts, but there is a big difference between Rudy Bratty holding land for development vs. Jim and Bob who became developers in the last two decades with a few projects under their belt that rely on investors.
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oasis100 wrote: Downtown core? zero chance under 1k sqft.
I was thinking along these lines as well. Does anyone else think differently?
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Like mentioned earlier, the economics of building a condo at 1k/sq. ft. don't work at current costs. So it's highly unlikely we see that because of simple inflation specific to development of real estate.
Last edited by RichmondCA on May 7th, 2020 10:29 am, edited 1 time in total.
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